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Foreclosure Fiasco

“Let’s kill all the lawyers,” Shakespeare demanded over 400 years ago. These days, lawyers have taken a back seat to Wall Street as the main target of public ire. But when a bank sues a homeowner for foreclosure or engages in any other legal action related to delinquent mortgages, they hire a law firm to represent them. Nicknamed “foreclosure mills” because of the relentless churn of cases they take on, these firms are complicit in much of the misconduct we attribute to banks throughout the foreclosure process. There’s a long list of documented abuse by foreclosure mills, which are often specialist law firms built to handle thousands of foreclosures at once. Because of their financial incentives, firms are rewarded for each action they take and frequently cut corners on legally mandated steps of the process. And like everyone else along the foreclosure chain, foreclosure mills have faced virtually no accountability for their misconduct. “It’s the crookedest thing I’ve ever seen in 38 years of law practice,” said Blair Drazic, a defense attorney in Grand Junction, Colorado.

But Colorado is the place where justice might finally get served, thanks to an investigation by state Attorney General John Suthers into the billing practices of leading foreclosure mills. The case, which has not yet led to charges, has so far featured allegations of bill-padding, collusion, destruction of evidence, and lobbying for personal gain. If Colorado is successful in reining in the worst conduct of the foreclosure mills, it could spark more scrutiny of their practices across the country.

In most states, one or two law firms conduct almost all legal operations tied to foreclosures. One firm carries out all the foreclosures in Michigan, for example, and another does every one in Washington state. Geoff Walsh of the National Consumer Law Center (NCLC) says this has to do with the technology particular to servicing mortgages. “There are computerized records and servicing platforms, and these law firms get tied into them,” says Walsh. “For most firms, this becomes all they do.” When the foreclosure crisis intensified in 2007, firms could squeeze out massive profits from kicking people out of their homes.

Having mini-monopolies means that firms can set their own standard practices, leading to multiple ethical lapses. Foreclosure mills actively participated in presenting robo-signed and false documents to state courts, in many cases mocking up the documents themselves. A Mother Jones investigation in 2010 exposed the David J. Stern Law Firm in Florida for backdating notarized documents and engaging in other falsifications. Subsequent investigations have revealed this is a routine practice at other foreclosure mills. Every time a state forces lawyers to personally attest to the validity of documents, such as in Nevada, New York, or Florida, foreclosure cases plummet.

Foreclosure mills are hired by mortgage servicers, companies that handle the day-to-day operations on mortgages but do not own the underlying loans. This is a major problem because mortgage servicers (frequently arms of big banks like Bank of America and JPMorgan Chase) want different things out of a foreclosure than the loan owners (who could be any investor, from a public pension fund to mortgage giants Fannie Mae and Freddie Mac) do. Investors in the loans frequently benefit from modifying a loan instead of foreclosing. But the mortgage servicer financially benefits from foreclosure because their compensation is structured in such a way that a modification hurts their bottom line.

In a case like the one filed by Colorado attorney Blair Drazic, it would have made more sense for the owner of the loan to modify: The home has an appraised value of $100,000, but the client could pay up to $1,200 a month to stay, which works out to about $432,000 on a 30-year payment schedule. But the foreclosure mill, acting at the behest of the servicer, pursued foreclosure instead. “This is a property only my clients could love,” Drazic says. “It’s a conflict of interest. The foreclosure mill purports to represent the [investors], but they’re throwing them on the street.” In another Drazic case, his client has a Federal Housing Administration (FHA) loan, and FHA guidelines clearly show that the servicer must pursue a modification before pursuing foreclosure. But the foreclosure mill ignored this practice. “The law firm is interfering with my client’s right to a modification,” Drazic says. “There’s so much money involved, it’s like the three monkeys—see no evil, hear no evil, speak no evil.”

In some states, the denial of modifications by foreclosure mills has become systematic. In New York, the Steven J. Baum Law Firm went out of business in 2011 over leaked pictures of a Halloween party featuring their employees dressed as homeless people. But before that, they flouted a state law requiring all foreclosure cases to go to a settlement conference where the borrower and the bank could work out a modification. Law firms have to file a “request for relief” to trigger the settlement conference. But the firm simply stopped filing the requests, creating a “shadow docket” of tens of thousands of foreclosure cases. MFY Legal Services, Inc. actually sued the law firm to speed up the foreclosure process and give their borrowers a shot at relief. Baum paid $4 million to the state for other violations before closing, but efforts to relieve the shadow docket in New York have stalled.

The investigation in Colorado involves something more akin to petty theft. Colorado is a nonjudicial foreclosure state, so foreclosure mills don’t have to take homeowners to court, but they must carry out various legal actions related to foreclosure, like posting a legal notice on the door of homes in foreclosure, informing the owners of their rights. Attorney General Suthers, a Republican, requested documents from county public trustees offices in May, which showed billing statements from foreclosure mills. While the cost to a foreclosure mill of attaching the notices to the door costs at most $25, firms were charging as much as $300, a twelve-fold markup. “The scope of the investigation is very simple,” said Assistant Attorney General Erik Neusch in one court proceeding. “Why [attorneys] charge more than their actual costs.”

Further filings by Suthers show that Castle Law Group and Aronowitz & Mecklenberg, Colorado’s two biggest foreclosure mills, bought specific process-server companies which did the actual work of posting the legal notices, and then colluded with one another to fix the price for posting notices at levels well above the actual cost (“I just wanted our offices to try and get on the same page on what we are charging for all of this,” wrote Stacey Aronowitz to Caren Castle in one 2009 e-mail). The firms then lobbied the state to mandate a second notice, which increased their profits two-fold. The firms earned $20 million over the past four years just on posting notices.

The homeowner must pay all legal fees to “cure” the default and stop foreclosure, or else they lose their homes. In one recent revelation, Colorado foreclosure mills charged homeowners thousands of dollars for nonexistent cases that they never filed. In the event of a foreclosure sale, the investors in the loan get reduced value relative to a modification, and the legal fees are thrown on top of that. This amounts to law firms “stealing from their own clients,” says Drazic.

Foreclosure mills tried and failed to keep the investigation sealed from the public. Castle Law Group and Aronowitz & Mecklenberg, the state’s two largest foreclosure mills, counter-sued the attorney general directly to prevent subpoenas for internal documents, arguing that they would violate attorney-client privilege. Then, in July, Susan Hendricks, a former associate at Aronowitz & Mecklenberg, came forward to allege additional misconduct at the firm, including padding fees, keeping refunds due to its clients, and destroying evidence essential to the investigation. Aronowitz & Mecklenberg sued unsuccessfully to prevent Hendricks’ testimony from going public, claiming that she was a “special counsel” to the firm, and that her information would also violate attorney-client privilege.

The Colorado investigation could prove a first crack in a system of profit-gouging and unethical conduct that stretches back years. In states where banks don’t have to go to court to foreclose on a homeowner, legal fees are harder to uncover, and it takes sustained oversight, like what we’re seeing in Colorado, to get results. Previous investigations have led to minimal fines, and sanctions through judicial conduct reviews have been nonexistent. One foreclosure mill in Florida, Marshall C. Watson, closed down their office after a State Bar disciplinary action, only to open it again with a different name and the same clients.

Lawyers who deal with foreclosure mills are struck by the ethical lapses of the attorneys at those firms, and how they could work on such criminal financial industry activities without speaking up. Says Drazic, “I used to represent murderers, and I wouldn’t represent these people.”

Comments

I've had several cases with Blair Drazic. He may say that he would not represent "foreclosure mills", but I can tell you they would never think about hiring him in the first place. His views expressed in this article demonstrate a severe misunderstanding of loan servicing, investor guidelines, foreclosure laws, and ethical rules. There is a clear reason that someone who has practiced for 38 years is doing foreclosure defense in the twilight of their career. You know what they say--it may be slimy to represent a lender in foreclosure, but it's even more crooked to take a homeowner's last few pennies by giving them false hope based upon legally unfounded theories.

Theoption30spiral clearly hasn't followed this subject. The article is exactly correct. There have been numerous lawsuits recently settled, with more to come, regarding how the investors of loan trusts were defrauded by originators and servicers. If you follow the Rescap bankrtupcy filings you can see that the Federal Housing Finance Agency has 18 lawsuits currently and was recently granted the ability to sue additional parties. The New Jersey Carpenters Fund, as investors in a RALI trust, were recently settled with for $100 million on their fraud claims. UBS just settled for $800 regarding fraud claims associated with Securitized Trusts and Nationstar recently was sued by investment group KIRP due to Nationstars fire saling of homes in auction, that they were supposed to be servicing and seeking loss mitigation options for. However, like the article says, it is more profitable to liquidate for a servicer. Additionally, the DocX/Lender Processing Services suit for the filing of false documents resulted in 1.9 billion in penalties and Lorraine Brown doing a minimum of 40 months in federal prison just two months ago. The National Settlement of 25 billion was largely based on the false filings of servicers and their third party attorneys.

Mark2020, you are the one not following the story. Lawsuits between investors and originators or servicers has nothing to do with homeowners/borrowers being supposedly wronged. The problem with this country is that you have a bunch of whiny people that refuse to accept responsibility for their own actions. These people came to these lenders requesting hundreds of thousands of dollars to purchase properties. The lender agreed to provide the funding pursuant to a written contract. The homeowner/borrowers refused to read/ignored the terms of the contract, and now want to jump up and down about how they were wronged. Until people start to act like adults and accept responsibility for their own faulta, this country will continue to trail the rest of the world. Contrary to popular belief, you are NOT entitled to a loan or to own real property in this country.

Here in Wisconsin, we have caught attorneys red-handed creating and filing forged documents, switching plaintiffs by changing captions, assigning mortgages after the homeowner filed BK, there is no limit to what these guys will do to win. There are no ethical attorneys practicing within the foreclosure mill industry. The criminality rivals the best racketeering operations ever launched by the banks and their law firms. Keep up the good work David! We're counting on you out here!!!!

Really??? Give a specific case number where someone tried to "switch" plaintiffs by changing a case caption. That's procedurally impossible, so it's a little hard to believe your representation. Also--news flash--assigning a mortgage while a debtor is in bankruptcy is perfectly legal as an assignment is not the act of perfecting a lien. That is well-established law in every state. Once again, simply people that haven't/can't make their contractual payments trying to find some technicality to thwart/delay/prevent a lawful foreclosure.

Hello Steven, here a case where the pretenders CHANGED the fraudclosing parties as WELL as parties names on mortgage... MORE Evidences . That THIS HOME WAS STOLEN! Fw: Is it time to file a motion for contempt? RE: Loan #0016711764 Index;# 8432/07

Who pays the worst of the worst foreclosure mills? In many cases, HUD, Fannie & Freddie.
These same deep pockets pay the document mills to create phony mortgage assignments and mortgage note endorsements. Sure, in tens of thousands of cases the trusts (investors) pay, but then the servicers submit these foreclosure costs to the primary mortgage insurers for reimbursement. Then we ask why there are no significant prosecutions.

Wow, the extent of bias in this piece is staggering, though not shocking. The larger problem is that there are considerable factual inaccuracies, and these serve to make it very challenging to take the writer seriously in the first place...

BTW, Theo30 is spot-on with his comments/opinions, and while others try to refute him, he is just offering a voice of reason...Are there bad apples in the industry - yes, absolutely. Should their actions then be used to broad-brush this entire space - nope, not unless you have a strong, one-track agenda, as seems to be the case here..

It is obvious that "theoption30spiral" and supporter "modcon" are most likely shills for the banks or government. Comments such as "Mark2020, you are the one not following the story. Lawsuits between investors and originators or servicers has nothing to do with homeowners/borrowers being supposedly wronged," is fatally flawed as both the investors and homeowners were both required to complete the ponzi scheme. http://4closurefraud.org/2012/01/25/kaboom-jpmorgan-failed-to-ensure-that-title-to-the-underlying-mortgage-loans-was-effectively-transferred/... The homeowners were defrauded at time of underwriting and appraisal and stand to lose their down payments, subsequent monthly payments, credit devastation leading to paying high interest rates for 7 more years, possible job loss due to poor credit. http://www.ritholtz.com/blog/2011/12/fbi-estimates-80-of-mortgage-fraud-involved-industry-insiders/...
http://www.nytimes.com/2008/11/02/business/worldbusiness/02iht-morgen03.1.17438825.html
http://www.huffingtonpost.com/2010/04/12/wamu-executives-knew-of-r_n_534800.html
http://seattletimes.nwsource.com/html/businesstechnology/2008342942_wamu03.html
http://blogs.alternet.org/speakeasy/2010/04/14/rampant-fraud-and-financial-collapse/
http://www.oregonlive.com/business/index.ssf/2010/04/wamus_mortgage_lendingpractice.html
http://www.msnbc.msn.com/id/36440421/ns/business-real_estate/t/investigation-finds-fraud-wamu-lending/
http://dev.publicintegrity.org/2011/12/22/7751/ex-wamu-worker-claims-he-was-shunned-refusing-push-toxic-loans-borrowers
http://motherjones.com/mojo/2010/04/washington-mutual-senate-investigation-levin-killinger-failure-autopsy-april-report
http://realestate.aol.com/blog/2010/04/15/et-tu-wamu-seattle-bank-was-subprime-polluter/6
http://finance.yahoo.com/news/A-Good-Example-of-How-Not-to-fool-734533602.html?x=0&.v=2
http://miseryindex2008.blogspot.com/2008_10_12_archive.html
If the banks' shills and moles (who get paid to confuse the ignorant "on the fence" type Americans,) can't even use their real names and proclaim their true identities while posting their deceptive and misleading assertions, then obviously they are hiding something. "HOW TO SPOT AND EXPOSE DISINFORMATIONALISTS, MOLES, TROLLS, AND SHILLS " , https://www.facebook.com/groups/510045569045648/doc/510150512368487/ -ROB HARRINGTON (my real name)

Perfectly logical. A person refuses to read the contract documents for a loan of significant money. Then when they realize several years down the road that they can't make their payments because of some term contained in the docs, they blame it on the lender and suggest they were involved in a Ponzi scheme. Makes perfect sense. Again people, take responsibility for the contract you signed and didn't read. I get that maybe some of the terms were risky, but blaming the lender is like blaming a drug dealer for offering you drugs--you don't have to take it. And, btw, I am not a paid "shill" or "troll". Not everything that turns bad in your life is an episode of X-Files. Come back to reality, Mulder.

Theo, as a former banker who was rewarded for uncovering fraud with dismissal, blacklisting and ultimately foreclosure when I was never late, much less in default, (using two different, fraudulent case captions in the attempt) I can understand your reluctance to believe bankers would do the horrific things they have been caught red handed doing. I get it. It sucks to know you have given your life to a criminal enterprise. But to claim the homeowners must adhere to a contract while the exempting the banks from adhering to the same contract is intellectually dishonest. And FYI - just in case you were absent that day --- an instrument acquired after default is unsecured.

I AM reluctant to believe you, because, when you pay, you don't get foreclosed upon. It's a mind-blowing concept.

List the case numbers and court location of the cases where you were "unlawfully" foreclosed upon. Better yet, post the docs. I'm sure, however, I bet you will say you can't post the docs or you can't find the exact case numbers.

Nope, I am not a shill for the industry, just someone with some insight and experience in this space...

For the record, when it comes to this topic, I believe that there is plenty of blame to go around. The list includes the banks (top brass, comp schemes, loan officers, etc.), the government (let's make sure that everyone owns a house, let's prop up this space by forcing banks to make loans to otherwise unqualified borrowers), the public (let's become a homeowner - look at these great terms - I will figure out how to pay the mortgage later, and, hey, I have all this equity in my house, let's cash it out and go play), SOME players (a small minority) in the FC industry (let's game the system - screw the regulators and folks in FC 'cause the opportunity is just too good), and others.

However, the (bad) actions of a few don't make the rest of the industry complicit in some master scheme. I have several friends/acquaintances who have had to sell/walk away from their homes. It sucks, no doubt, but they were in over their heads, ultimately. And, they will be OK, with a really tough lesson learned...

Look at Mcculley V US BANK http://www.thelegaldescription.com/TLD/ArticlesTLD/Buyer-receives-wrong-mortgage-sues-bank-title-co-58077.aspx Talk about Fraud ! And what's worse is the foreclosure attorney mill of Mackoff Kellogg, who is representing the bank, WITHHELD her 30 year loan TIL from discovery and instead filed a credit memo claiming it was a "letter to her outlining the terms of her loan." After summary judgment and before the Supreme Court appeal, Mcculley was able to acquire the original 30 year TIL and GFE, at great expense, which US BANK swore didn't exist. Don't tell me these foreclosure attorneys aren't scum bags ! Fraud perpetuating fraud. Thank God the Supreme Court of Montana saw through their BS, and sent it back to district for trial.

I am visiting Mackoff later this week to view the original deed and note that they were able to produce in two weeks time while no one else has been able to in over three years! AND, the note that has been provided is a forgery (hence my request to see the original).
I just am tickled to see the craftsmanship of this wet ink note they scanned and emailed. And, to the moles and trolls, don't bend the truth. You are placing blame on the borrowers, but truth is my "lender" was a NON-EXISTENT corporation and IN FACT did not loan me a dime. And, I do have actual proof of that. I was deceived into a financial scheme. I got the wire information, and it wasn't from the lender of record!